Optimal inflation in a model of inside money

There are several models of outside money in which some inflation accomplished through lump-sum transfers is optimal. It is shown here that inflation can be optimal in a model of inside money, essentially the model in Cavalcanti-Wallace (1999). The possibility of inflation comes about via the trades between people who can issue inside money, monitored people, and those who cannot, nonmonitored people. Inflation occurs at the optimum if the monitored people spend more in such meetings when they are buyers than they receive in such meetings when they are sellers. (Copyright: Elsevier)